RED ALERT

2003. I have several lovely clients from Malaysia who’ve bought and sold a few investment properties through me. One of them refers an equally delightful man to me and I eventually receive an email from him.

Hapless (I use that word a fair bit I guess but it’s such a good descriptor) fellow was “stitched” into buying an Apartment “Off the Plan” and settled in 1998 or thereabouts.

The “deal” included a Rental Guarantee of 7% per annum on his $299,000.00 purchase price for the first two years, rising to 8% for years 3 and 4. From Year 5 the rent reverted to market return.

WARNING! Every time you see the phrase “RENT GUARANTEE”…..RUN A MILE! If a property can’t stand on its own two feet in the marketplace and needs to be propped up by a developer’s rent guarantee, chances are it’s going to fall over as soon as the “crutch” is removed.

Anyway, he wanted to sell the Apartment and asked me to appraise it for sale. I had him sign the appropriate forms appointing me as his agent and off I toddled to inspect the Apartment. I arrived at Reception and asked, if there was no-one holidaying in the Apartment, if I could inspect it on behalf of the owner. The guy behind the counter looked at me sideways and told me to “P**s off!”

As there appeared to be no-one else to talk too, and not wanting to make a scene, I retired, hurt and bewildered, to the car park.

Next day I called the front desk, spoke to a lady who was only somewhat more sympathetic and I made a time to inspect later in the day. I duly arrived and another, different fellow told me to F*** off and get off the property!

No longer bewildered and now really ticked off I called a solicitor mate who fired off a FAX telling them to let me inspect the property or there would be trouble.

Third time lucky I guess? I had the keys thrown at me when I arrived. Very strange behaviour.

I inspected the property and noted large rooms, good condition, good balcony, views and breezes although noisy from passing traffic. I thought that he may just get his money back as further research indicated that similar properties were selling for more than $70,000 less at the time he settled.

I emailed my new client and asked him to forward me his last two years of rental statements, Council Rates and Charges, Body Corporate Fees and On Site Management Fees and Charges breakdown. I also needed an inventory of furniture and fittings and any photographs and marketing material supplied to him at the time of purchase.

It was about this time I discovered he’d never seen or set foot in the Apartment.

A series of PDFs popped into my INBOX.

First thing that struck me was the photographs of the furniture and fittings inventory didn’t look like anything I saw in the Apartment. I was to learn that his nice furniture was gradually and quietly siphoned off over time to other Units to be replaced with sub standard furniture from what may well have been a Charity Sale.

His latest Annual Statement of Rental Return went something like this, and believe me, this was ALL IT WAS. There were no breakdowns or explanations for the absurdity of the figures I’m about to reveal.

GROSS ROOM REVENUE $35,000.00

Less

Direct Accommodation Expenses $17,500.00

Overhead Accommodation Costs $8,650.00

Capital Replacement Reserve $720.00

Body Corporate Charges $4,722.00

Council Rates and Taxes $2,860.00

Net Room Revenue $528.00

528.00 for the year!

Years 1 and 2. $20,930.00 per year

Years 3 and 4. $23,920.00 per year

Years 5 onwards. $528.00 per year!!

This guy was very well educated and had a large income by Australian standards so he was very wealthy in Malaysia.

Who accepts “Direct Accommodation Expenses” that represent FIFTY PERCENT of what appeared to be a most reasonable gross room revenue with no breakdown or explanation?

Who accepts “Overhead Accommodation Costs” of nearly $9,000.00 with no further explanation of what that meant?

Furthermore, the On Site Managers refused to supply my client with source documents relating to Council Rates and Body Corporate charges, adding to my suspicion that something wasn’t right.

It was when I received some kind of Annual Report from my client that I saw the extent of what could and can only be described as FRAUD. I recall a gross Income Statement of some $2 million for the building and costs to operate of $1.6 million, again with no breakdown or explanation.

It was explained to me by an associate who knew the building that it was operated as a Hotel of sorts and that all revenue was pooled, costs deducted and then shared amongst the owners and that the “Statements” meant nothing. Fabrications.

My poor client’s monthly cheque was $44.00.

My client could not escape as the On Site Mangers were in place for many, may years to come. I told him that it was possible for Owners to band together and complain to the Office of Fair Trading (and the Police Fraud Squad if necessary) and have the Managers removed and a new agreement signed with a new Management Team but it all seemed too hard to achieve from Malaysia. Poor guy didn’t know any of the other owners either, which really did make it impossible for him.

My appraisal as to Sale Price didn’t impress the poor man. $10,000.00 – $18,000.00. Based on the return, that was all it was worth.

I never heard from him again.

Fast forward to this week… 20 November 2012…

These Units are being packaged up and sold in a most unscrupulous marketing campaign. Buy a one bedroom for just over $50,000.00 and a two bedroom for about $110,000.00. There is NO RETURN and NO COSTS for the next 9.5 years as the Units are “tied up” in a Lease Back arrangement according to Agent.

“Imagine what these will be worth in ten years when the market has turned around”, says the Agent.

In ten years time folks, according to my calculations, they will be worth $18,000.00 and $36,000.00 respectively!

The Agent, in speaking with me, bragged that “astute” investors were snapping them up in their Self Managed Superannuation Funds! I nearly fainted.